Williams Companies, Inc. 2018 First-Quarter 10-Q Summary
Business context and reporting period
Williams is a U.S.-focused energy infrastructure company connecting natural gas and natural gas liquids supply basins with demand markets. Its single reportable segment is Williams Partners L.P. (WPZ), which includes interstate gas pipelines, gathering, processing, storage, NGL and offshore services. Williams owned approximately 74% of WPZ as of March 31, 2018.
The filing covers the three months ended March 31, 2018, and was filed May 3, 2018. The financial statements are unaudited. Williams had 827.6 million common shares outstanding as of April 30, 2018.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $2.088 billion | $1.988 billion | +$100 million |
| Operating income | $491 million | $430 million | +$61 million |
| Net income | $270 million | $569 million | -$299 million |
| Net income attributable to Williams | $152 million | $373 million | -$221 million |
| Diluted EPS | $0.18 | $0.45 | -$0.27 |
| Cash flow from operations | $694 million | $727 million | -$33 million |
| Capital expenditures | $957 million | $511 million | +$446 million |
| Williams Partners Modified EBITDA | $1.107 billion | $1.132 billion | -$25 million |
Reported operating margin was approximately 23.5%, compared with 21.6% in the prior-year quarter. Net income attributable to Williams represented approximately 7.3% of revenue, compared with 18.8% in Q1 2017. The filing does not present a consolidated adjusted EBITDA measure; total segment Modified EBITDA was $1.120 billion.
Cash and cash equivalents totaled $1.292 billion at March 31, 2018, compared with $899 million at year-end 2017. Total debt, including current maturities, was $21.880 billion, compared with $20.935 billion at December 31, 2017. Williams reported $235 million of working capital surplus and total available liquidity of approximately $6.092 billion, comprising cash and undrawn credit capacity.
Williams paid a quarterly dividend of $0.34 per share in March 2018, up from $0.30 per share in each quarter of 2017. The company reported total assets of $47.052 billion and total equity of $15.903 billion at quarter-end.
Material changes versus the prior comparable period
- Service revenue increased $90 million, primarily from higher Transco transportation fees following expansion projects placed in service and increased gathering volumes.
- Revenue presentation changed under ASC 606. The company recorded $101 million of service revenue from commodity consideration and $35 million of related processing commodity expenses. Most of these amounts have limited impact on operating income because the commodities are generally sold in the same period.
- Product sales declined $91 million, principally because WPZ sold its olefins operations in July 2017, eliminating approximately $146 million of olefin sales in the quarter.
- Operating income improved despite higher operating expenses, while selling, general and administrative expense declined $29 million due to the absence of prior-year severance, organizational realignment and olefins-related costs.
- Net income attributable to Williams declined primarily because Q1 2017 included a $269 million gain on dispositions of equity-method investments and a $127 million tax valuation allowance release. Q1 2018 included a $7 million loss on early debt retirement, compared with a $30 million gain in Q1 2017.
- WPZ Modified EBITDA declined $25 million, reflecting the absence of approximately $51 million of olefins-related EBITDA and lower equity-method investment results, partly offset by higher Transco fee revenue and improved NGL margins.
- Operating cash flow declined modestly, while capital expenditures increased substantially to support expansion and infrastructure investment.
Guidance, outlook, commentary and risks
- Management expects 2018 operating results to increase through organic growth, particularly from Transco expansion projects and continued Northeast growth. Consolidated growth capital and investment expenditures are expected to be at least $2.7 billion, including approximately $1.7 billion for Transco and other interstate pipeline projects.
- WPZ expects to fund planned growth capital with retained cash flow and debt and does not expect to access public equity markets for the next several years based on current project forecasts.
- Atlantic Sunrise is expected to be fully placed in service in mid-2018, subject to remaining regulatory approvals, increasing capacity by an expected 1,700 Mdth/d. Other projects have planned in-service dates from 2019 through 2021.
- Management expects lower or comparable natural gas prices in 2018 and slightly higher or comparable NGL prices. Lower commodity prices could reduce gathering and processing volumes, customer credit quality and asset values, although fee-based businesses reduce direct commodity-price exposure.
- The FERC’s March 2018 policy statement eliminated income-tax allowances in the cost of service for MLP interstate pipelines and may adversely affect future regulated pipeline rates. Williams had recorded $678 million of regulatory liabilities related to expected refunds or rate effects from Tax Reform.
- Constitution Pipeline remains subject to unresolved permitting and litigation issues. Williams has $379 million of capitalized project costs at risk of impairment if required certification cannot be obtained or the project is delayed or terminated. The U.S. Supreme Court denied review of the NYSDEC certification decision on April 30, 2018; a separate FERC rehearing request remained pending.
- Other risks include project permitting and construction delays, customer and counterparty credit exposure, lower energy demand or prices, increased interest rates, operational incidents, environmental liabilities, cybersecurity threats and potential impairments of investments.
- Material contingencies include natural gas price-index litigation, Alaska refinery contamination matters, environmental remediation, royalty disputes and litigation involving Energy Transfer. The filing states that certain potential losses cannot currently be estimated and that an adverse resolution of the gas-index matters could be material.
Most important facts for investors to verify
- Reconcile year-over-year performance using comparable ASC 606 measures, because the new revenue presentation materially changed reported revenue and expense classifications.
- Monitor the effect of the FERC income-tax policy and Tax Reform on pipeline tariffs, regulatory liabilities, refunds and future cash flow.
- Track delivery, permitting and cost execution for Atlantic Sunrise and other major growth projects against the planned minimum $2.7 billion of 2018 capital and investment spending.
- Assess leverage, refinancing needs and interest costs relative to the $21.880 billion debt balance and the company’s below-investment-grade WMB ratings.
- Evaluate the potential impairment exposure related to Constitution Pipeline and the Discovery equity-method investment.
- Review whether operating cash flow and WPZ distributions are sufficient to fund capital expenditures, debt service, WPZ distributions and Williams’ $0.34-per-share dividend.